TERRORISM RISK INSURANCE SEPTEMBER 18, 2013

MARSH 1 May 12, 2015 The September 11, 2001, terrorist attacks created a severe market shortage for terrorism insurance The US Congress passed the Terrorism Risk Insurance Act (TRIA) as a federal “backstop” for insurance claims related to terrorism events in the US and US interests abroad –It has been extended (with amendments) twice and the current Act is scheduled to expire on December 31, 2014, if not renewed Marsh’s 2013 Terrorism Risk Insurance Report examines, in-depth, the continued demand for terrorism insurance based on take up rates, coverage nuances, and a number of other factors – data that supports an extension of TRIA TERRORISM RISK INSURANCE The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA)

MARSH 2 May 12, 2015 Evolution of TRIA TRIA 2002 TRIA Extension 2005 TRIPRA 2007 TerminationDecember 31, 2005December 31, 2007December 31, 2014 Make-available provision Must make coverage available for certified acts of terrorism on same terms and conditions as for other covered risks No change Covered acts Foreign terrorism in the U.S. and on U.S. interests abroad. Includes an act of war for workers’ compensation policies only. No change Foreign and Domestic terrorism in the U.S. and on U.S. interests abroad. Includes an act of war for workers’ compensation policies only. Certification level$5 millionNo change Program trigger$5 million $5 million in 2006 (thru March 31, 2006) $50 million in 2006 (after March 31, 2006) $100 million in 2007 $100 million in insured loss in a Program Year Covered Lines Commercial property and casualty (P&C) insurance (including excess insurance, workers’ compensation and surety insurance) Commercial P&C insurance (including excess insurance, workers’ compensation and directors and officers insurance) No change Excluded  Federal crop  Private mortgage  Financial guaranty  Medical malpractice  Health or life insurance including group life  Flood under NFIA  Reinsurance or retro Added Exclusions:  Commercial auto  Burglary and theft  Surety  Professional liability  Farm owners multiple peril No change Insurer Deductible (% of direct earned premium) 15 percent in percent in percent in percent Federal reinsurance quota share90 percent in percent in percent in percent Insurance industry retention for mandatory recoupment $15 billion in 2005 $25 billion in 2006 $27.5 billion in 2007 $27.5 billion Cap on liability$100 billionNo change

MARSH Summary of Proposed Legislation As of September 10, 2013 Stipulations Terrorism Risk Insurance Act of 2002 Reauthorization Act of 2013 (H.R. 508) Terrorism Risk Insurance Program Reauthorization Act of 2013 (H.R. 2146) Fostering Resilience to Terrorism Act of 2013 (H.R. 1945) Sponsorship 75 cosponsors, 35 Republicans and 40 Democrats 31 cosponsors, 30 Democrats and 1 Republican 6 Democratic cosponsors Term (Expiration)December 31, 2019December 31, 2024 Recoupment DeadlineSeptember 30, 2024September 30, 2027September 30, 2024 Reporting RequirementsNone 2013, 2017, 2020, and 2023 on the findings of the President’s Working Group on Financial Markets to determine long term affordability/availability of terrorism insurance Other Key ChangesNone − DHS to provide Insureds with appropriately classified terrorism risk information and information on best practices, to “foster resilience” to a terrorist act − Act Certification by Secretary of DHS (and not Sec. of State) in concurrence with Sec. of Treasury 3 May 12, 2015

MARSH How The Act Works 2007 Renewal (Current In-Force) Recoupment Process −For certified acts up to and including $27.5B, Treasury is “required to recoup 133% of the government coverage…through surcharges on property/casualty insurance policies” by Sep. 30, 2017 −If the industry loss exceeds $27.5B, Treasury has discretionary authority to apply recoupment charges −Surcharge to policy not to exceed 3% of policy premium 4 May 12, 2015

MARSH 5 May 12, 2015 Property Terrorism Insurance Take-up Rates By Industry

MARSH 6 May 12, 2015 Property Terrorism Insurance Take-up Rates by Region

MARSH 7 May 12, 2015 Terrorism exposure presents a unique challenge for workers’ compensation insurance –Workers’ compensation coverage is compulsory – employers are required to provide it to employees –Individual states regulate the line of business –Statutory / unlimited requirements for workers’ compensation loss –No option to exclude or sublimit any form of terrorism loss (i.e. conventional or NBCR) TRIPRA does not distinguish between attack modes Coverage follows that afforded in the primary policy Annual policies with expiration dates on or after 1/1/2015 may be negatively impacted TRIPRA and Workers’ Compensation

MARSH 8 May 12, 2015 Small v. Large Carrier Concerns 2012 industry surplus for insurance companies writing TRIPRA exposed business is $589B Approximately 850+ carriers subject to program A higher percentage of the surplus for smaller insurers is required to meet the deductible requirements of TRIPRA. Consequently, smaller insurers tend to incorporate TRIPRA recoveries into their risk management strategies Larger insurers with TRIPRA deductibles in the billions of dollars tend to manage their exposures to specific zone accumulations rather than incorporating TRIPRA recoveries Rating agencies are focusing on risk accumulation / aggregation profiles and are asking insurers for specific strategies if TRIPRA expires without a replacement Reinsurers are able to provide more coverage for conventional weapons attacks than for NBCR attacks

MARSH Efficacy of Private Market Reinsurance Capital −September 11, 2001 $32.5B (2001 dollars) $42.9B (2013 dollars) 1 −Largest Modeled Conventional Weapon Loss $38.6B 2 – 10 ton truck bomb in Midtown Manhattan −Largest Modeled NBCR Loss $941B 2 – nuclear detonation Midtown Manhattan (Re)Insurance Industry is not adequately capitalized to support NBCR Loss Notes: dollars based on Bureau of Labor statistics CPI Index 2.The loss figures above assume a 100% Property take-up rate among commercial insureds 3.Industry capital figures presented assume 100% of capital is available, or deployed, to cover terrorism. In reality, many (re)insurers – particularly capital/convergence markets – have little-to-no appetite to write terrorism because of correlation with financial markets loss. Source: Guy Carpenter Business Intelligence May 12, 2015 Est. $195B Global Reinsurance Dedicated Capital Est. $700B 3 P&C US (Re) Insurance Dedicated Capital Est. $100B North American Reinsurance Dedicated Capital Private Industry CapitalLoss Scenarios 9

MARSH 10 May 12, 2015 Current Market Impacts Estimate $750M to $2B of individual risk capacity –Less capacity available and more expensive for terror exposed central business districts Uncertainty around TRIPRA’s future and the possibility of late extension is creating capacity and pricing issues for insurance buyers –Large carriers have implemented “conditional TRIPRA endorsements” and pushing prices up on large accumulation risks Market impact is expected to worsen starting on January 1, 2014 –Carrier withdrawal and / or short term policies issued –Especially on the workers’ compensation line of business Absence of TRIPRA or a substantial change, will –Increase cost to insurance buyers across many industries –Reduce availability of terrorism coverage in the private market –May cause some policyholders to go without insurance protection against terrorism exposures

MARSH 11 May 12, 2015 Considerations for Reauthorization of TRIPRA Qualitative Changes Inclusion of cyber terrorism as an enumerated covered line of business Improve certification process and timing Bi-furcated coverage: Conventional (where more private market capacity is available) and NBCR perils (where it clearly is not) Quantitative Changes – Range Estimates Based on Ongoing Debates 1.Company deductible –May be increased (incrementally) from 20% to 25% in line with growth in industry surplus 2.Aggregate threshold –May increase aggregate trigger from $100M to $250M over time. Impact on regional/mutual insurers should be considered 3.Company co-insurance –Potential for increase in insurers co-participation from 15% to 20% Notes: –Restrictions of TRIPRA based on the ranges outlined above may cause some level of market disruption and / or increase the cost of insurance coverage –The numbers above do not constitute Marsh & McLennan Company’s recommendation and are intended to reflect the range of discussions on some possible changes in a reauthorization of TRIPRA

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